Islamic Finance is More Susceptible to Regulatory Arbitrage

Regulatory arbitrage provides clever bankers and lawyers with a way to exploit different jurisdictions’ regulatory structure—most often those with strict rules-based systems where form is placed above substance—to their advantage.  Because many of the countries where Islamic finance operates are classified as emerging and frontier markets, and because Islamic finance itself is underdeveloped relative to conventional finance, there are likely to be more opportunities for regulatory arbitrage in Islamic finance.  

There are many ways that regulatory arbitrage can be used by institutions of all varieties, and that includes within Islamic finance.  However, there are concrete first steps being made on a country-level (specifically in Indonesia and Qatar) that will remove some of the opportunities for regulatory arbitrage, but there will need to be globally accepted, mandatory regulatory standards like the Basel accords in order for Islamic finance to significantly reduce industry- and  world-wide regulatory arbitrage, although the three Basel accords have demonstrated that more work will remain even once standards are in place.  

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